- Eric Rosenberg is a former bank manager. When his sister started getting a paycheck at her first job, she asked him where to put her money.
- They reviewed all her accounts and decided the right place for her emergency fund was an online high-yield savings account, where she could earn interest of 2% or more – about 200 times what she’d been earning at a traditional bank.
- Also, her money is readily available in case she needs it quickly.
After working as a bank manager and more than a decade of writing about personal finance, I was asked by my little sister for advice on how to handle her money. When she started getting a paycheck from her first job, she wanted to make sure she was doing things right.
We sat down and reviewed every financial account she has, for a major money overhaul. When the makeover was complete, she found herself with better accounts that were a better fit for her needs.
One of the most important financial protections for anyone is an emergency fund, and that was one of the first places we focused on to level up her savings.
Start with a focus on interest rates
Before our chat, my sister had her money at a large, traditional brick-and-mortar bank. The problem with using an old-school bank for your savings starts with interest.
The average interest rate on a savings account at any of the largest banks in the US is typically below 0.1%. In some cases, you’ll get a paltry 0.01%! That’s far less than inflation, meaning you are effectively losing money with this type of account.
The best online banks, on the other hand, typically offer interest of 2% or more on a savings account. If you move from an account that pays 0.01% to one that pays 2%, you are getting 200 times as much. That is far from insignificant.
You should never pay a fee for your savings
One of the biggest downsides of checking and savings accounts at the big banks with physical branches is fees. Most of these accounts charge a fee if you don’t meet certain minimum requirements.
Fees are a big moneymaker for banks, but savvy savers don’t pay them. My favourite online banks (and most credit unions) don’t charge any fees for savings accounts, with no minimum balance. If you’re not careful, you’ll give the bank more in fees in a month than you would get over years of interest at a low rate.
If you need to withdraw from your emergency fund for a medical bill, a car repair, or anything else, it is possible you would go below the bank’s minimum balance to avoid a fee. Her old bank did this to her, which was part of her motivation to make a change.
While the $US10 fee may not seem like a big deal, you shouldn’t have to pay to store your money in a bank. They make money by lending it. Charging savers for going below a minimum balance is a terrible practice that I wish would end.
But for today, you can avoid them by moving to a bank that doesn’t have minimum-balance requirements or other silly fees on savings accounts.
I told her to put her money in a high-yield savings account
Once we finished looking things over, I told my sister she should move her emergency fund to either Capital One or Ally. Both banks offer competitive interest rates, have no minimum fees, and provide excellent customer service. I have banked with both and encouraged my sister to choose between the two.
We looked at the account details, and she decided on Ally. The month after she moved the funds, she called me, excited about earning so much in interest. Every month since, she has far outearned what she would have had at her old bank, and she has not paid a fee.
I suggested this setup even if she didn’t move her checking, though both of these banks offer excellent checking accounts as well. In her situation, it is unlikely she would need access to her funds in less than three business days. In a real emergency, she can pay for the cost with her credit card and transfer funds from her emergency fund to pay off the bill before the due date, avoiding any interest charges.
Put your money to work
Your money is too important to ignore. And while moving funds to a new account at a new bank may seem like a hassle, opening an account with an online bank is painless in most cases. You can open a savings account at most popular online banks in just a few minutes, sitting on your couch in your pajamas, from your smartphone or laptop.
Even if it took a few hours – which it shouldn’t – it would be worth it in most cases. With a $US5,000 emergency fund, you would earn just $US0.04 a month at 0.01%. At 2%, you would take home $US8.33. Thanks to compounding, the benefit of a higher interest account grows every month.
If you want the same brotherly advice I gave my sister, here it is: Get out of a low-interest, high-fee account as fast as you can. Just a few minutes of work to pick a new account can pay huge dividends for years to come.
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